In Rejecting Facebook, Snapchat Still Extracts Value

Snapchat’s CEO Evan Spiegel could have sold his two-year-old startup to Facebook for about $3 billion. But he said no.

When the Journal reported his rebuff on Wednesday, some in Silicon Valley and beyond thought Spiegel was crazy. Yet even without a deal, the founder still got something important: leverage and stature for future negotiations.

“It helps set a floor for future fundraising, as long as there continues to be some traction,” said Brian Wieser, an analyst with Pivotal Research. “There are late stage cross-over investors that will be more willing to pay,”

The bragging rights are substantial. According to people briefed on the matter, Facebook’s offer, including earnouts — extra payments if certain targets are hit — could have ultimately put the deal far higher, closer to $4 billion.

Spiegel and a Snapchat spokeswoman did not respond to requests for comment.

In recent weeks, Spiegel had been exploring an investment in his mobile messaging company at a valuation near $4 billion. His company didn’t need the money – it had just raised $60 million this summer in a financing round led by Institutional Venture Partners.

For a new round, he got some interest, including from Chinese Internet giant Tencent.

But several blue-chip venture capital firms who have the checkbooks and stomachs to handle lofty valuations turned away.

One person at such a firm said Snapchat’s round was not attractive to many traditional venture investors, in part, because the company’s valuation more than quadrupled in less than six months. Earlier this summer, Snapchat – which still has no revenue — raised money at an $800 million valuation. That dramatic leap would have made it hard for any venture firm to justify jumping in now, the person said.

Another person close to a strategic investor said the firm also felt uneasy about a deal because of Spiegel’s interest in selling a decent block of personal shares. Such sales can raise red flags for investors, who sometimes interpret it as a signal that the founder is not as confident in his or her long term prospects.

Now, Spiegel will not likely consider an acquisition or an investment at least until early next year, people briefed on the matter have said. They said Spiegel is hoping Snapchat’s numbers – of users and messages – will grow enough by then to justify an even larger valuation, the people added.

If all Spiegel wanted to do was maintain control and set himself up for a far bigger valuation down the line, he certainly has the world’s attention — and now a little bit of extra leverage.

This is not the first time Facebook has helped Snapchat’s valuation.

Last year, Facebook entered the market with “Poke,” a messaging app similar to Snapchat that got some initial traction but eventually faltered. According to Onavo, a mobile analytics company that Facebook purchased in October, Snapchat is the eighth most popular app, based on US iPhone users, in Onavo’s vast database. Facebook’s Poke app, in contrast, was not used by enough users to show data and is ranked at less than 1500 in its category.

Poke’s difficulty indicates that the upstart’s success might be difficult to replicate, even for deep-pocketed company like Facebook.

“We now talk about it as the greatest Christmas present we ever had,” Spiegel said at a TechCrunch conference in September.

The latest present — a rejected offer of more than $3 billion — might be even better.